From this week's Barron's:
Sweet Dreams
Krispy Kreme Doughnut's shares are on a sugar high
For all the hope and hype surrounding technology stocks, it's bites--not bytes--that most rewarded investors in the past 14 months. We're referring to Krispy Kreme Doughnuts, a decidedly lowtech doughnut vendor that saw its stock rise more than sevenfold, to a recent high of 77.10, from a split-adjusted price of 10.50 in April 2000. About 40 of those points were picked up in the past two months, amid a migration from the gloomy confines of the Nasdaq to the sunnier climes of the New York Stock Exchange.
That Krispy Kreme is the toast of doughnut cafe society comes as no surprise to Barron's. The Company's pillowy pastries trounced the competition in our taste test last July. But the continued trajectory of the shares, which split 2-for1 in March and will split again June 14, is another matter. While we applauded Krispy Kreme's solid operating record last summer ("Dollars to Doughnuts," July 10, 2000), we cast a skeptical eye on the stock's price/earnings multiple of 95 times fiscal 2001 estimated earnings, which seemed a mite caloric for a chain of doughnut shops.
Krispy now boasts 180 company-owned and franchised stores and continues to expand. Earnings in fiscal 2001 (ended January) rose 147% to $14.7 million or $.55 a share, on a 36.5% jump in revenues, to $301 million. In this year's first quarter, net increased a further 88%. Yet sales at stores open at least a year, though still robust, have been dropping in each of the past four quarters.
Meanwhile, Kripsy Kreme's shares, which closed last week near 73, still trade for about 95 times fiscal 2002 expected earnings of 76 cents a share. But their recent surge may have less to do with the public's fondness for hot doughnuts than short-covering in the stock. The company has approximately 28 million shares outstanding after the March split, although only 11.5 million were eligible for trading. By the end of April, however, one short-seller explains, insiders were eligible to sell another 14.8 million shares that had been "locked up" subsequent to the IPO and a secondary offering last winter. The shorts believed most of these shares would come into the market, depressing the price of the stock. But to date that hasn't been the case, as just a million or so of the unlocked shares have been filed for sale.
Some short-sellers already have covered this positions. As of mid-May, short interest in Krispy Kreme had falled to 5.9 million shares from a peak of 9.9 million shares in mid-March. Chances are others have covered since, driving the price even higher-perhaps high enough to tempt Krispy Kreme insiders to part with more of their stock. |
